Central Bank Digital Currency (CBDC)

Dec 2, 2022 | Updated Dec 2, 2022
A Central Bank Digital Currency (CBDC) is the electronic version of a country’s fiat currency, and is issued by the central government. CBDCs are like cryptocurrencies, but their value is tied to the country’s physical currency.

What is a Central Bank Digital Currency in Crypto?

A Central Bank Digital Currency or CBDC is a digital currency issued by a country’s government. Its value is tied to the domestic currency of the country, such as the Chinese yuan This means that a 1 digital yuan issued is equivalent to a $1 fiat currency, or actual yuan. Since CBDCs are government-backed e-currencies, their issuance, sanction, and distribution are entirely regulated by the government. Unlike other digitized cash, CBDCs are considered as the liability of the country’s central bank and not any private commercial banks. As such, it is far more secure in its value than other digital currencies, like cryptocurrencies. Recent studies show that more than 100 countries, including 19 G20 nations, have accelerated the use of CBDCs.

What is the Difference Between CBDC and Crypto?

CBDCs are similar to cryptocurrencies; both are different forms of virtual currencies. They both use blockchain technology to store and verify transactions, and both can be a substitute for physical cash to use for payments of goods and services and other transactions. However, there are certain core differences:

  • Centralization – CBDCs are managed by a central government. The government controls the flow of funds, and transactions. Cryptocurrencies are decentralized and are not governed or regulated by any central authority.
  • Issued by the national bank – CBDCs are issued by the national bank of its home country. On the other hand, cryptocurrencies are issued by decentralized networks.
  • Anonymity – Cryptocurrencies have anonymity, in that users do not need to disclose their private information. CBDCs are issued by a bank, which retains all personal details of the user.
  • Networks – CBDCs are run by a permissioned blockchain network, meaning one in which a limited number of gatekeepers decides who can access, use and govern the blockchain. On the other hand, cryptocurrencies use permissionless networks, meaning anyone can interact with the network.

Benefits of CBDC

Some potential benefits of CBDCs include:

  •  Improved payment modes and monetary policies
  • Easier international payments.
  • Control of criminal activities.
  • Reduced transaction costs through central banks.
  • Easy transfers, financial security, and convenience for users.
  • Added stability and simpler digital payment systems.
  •  Low volatility compared to cryptocurrencies

Risks of CBDC

Apart from the benefits, there are a few drawbacks including:

  • Cybersecurity threats
  • Impact on the existing monetary policy.
  • Operational disruptions.

Furthermore, because CBDCs are still in the developmental stage, there are a lot of developing policies and procedures, which can lead to unpredictable issues moving forward.

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